Decommoditising Commodities: Add Value


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Like death and taxes, commoditization is a given. So what’s a business to do? The answer is to de-commoditize…but not just once…continuously!

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Decommoditising Commodities: Add Value

  1. 1. De-Commoditizing Commodities: Add ValueBy Gautam Mahajan“Constant reinvention is the central necessity at GE…We’re all just a moment away fromcommodity hell.”– Jeffrey Immelt, Chairman and CEO, GELike death and taxes, commoditization is a given. So what’s a business to do? The answeris to de-commoditize…but not just once…continuously!Wiki says commoditization is the transformation of the market to undifferentiated productsthrough increased competition, typically resulting in decreasing prices. In economic terms,commoditization is when a market changes from one of monopolistic competition to one ofperfect competition. A product essentially becomes a commodity when customers perceivelittle or no value difference between brands or versions. Price becomes the onlydifferentiation.If all you can sell on is price, it means you have no other features to sell on. Or that meansthe purchaser sees nothing other than price to differentiate your product (You are acommodity and it’s the luck of the draw on selling or on pricing).One certain way to commoditization is the thought of being “Good enough".In todays Copycat Economy, "good enough" is a frequent response from customers andinvestors—theyre overwhelmed with high-calibre options of goods and services, customersare no longer easily satisfied. They raise the bar on their minimum expectations of qualityand service, and they expect to receive it.The tentacles of the Copycat Economy extend throughout the market, even into "luxury"sectors. An observer of the private jet market noted in 2002, "After a huge growth spurt inthe jet market, the jet manufacturers find themselves with a ton of capacity and product ….Business jets are heading toward commoditization—meaning they are becomingessentially interchangeable—because of the large array of models with similar capabilities."Imitation and commoditization are the most pressing strategic challenges that you will facefor the duration of this decade.Various methods are used to de-commoditize. The most common is to become the low costsupplier and try to make more profit than competition. This is not true de-commoditization,but just being the best in a commodity market. The other is to reduce prices and if you gotoo far, be the first to die.Differentiation is the other method: Product, brand and service differentiation.
  2. 2. Innovate, bundle (add a service to it or add another product), and segment are commonways that people use. The real differentiator is value differentiationProduct differentiation is the most popular. This certainly helps, but the advantage is shortlived as competition comes up with me too products.For example, the product 7UP was a commodity for many years. Recognizing the trend forcustomers to want healthier drink options, 7UP de-commoditized their soda by taking out allthe artificial flavours and ingredients and making their product natural. After they launchedtheir new “natural” campaign, sales of 7UP increased.Segmentation of the market is another method. Natural gas producers were able tosegment during an oversupply situation. They used a trained Customer Value team forunderstanding the “Day in the Life of a Customer” and were able to add value to certainsegments leading to a 40% increase in profits.Water is a commodity. The price of water and perhaps level the demand will vary whenwater is scarce, such as in the summer time. You could play that game (wait for scarcity).Water is water… until you put it in a bottle. Once you put water in a bottle, you can chargefor it. You can then put the water in a fancier bottle and charge some more. You can alsoadd some vitamins to it, give it a fancy name, and charge even more. Now you’re taken acommodity and you’ve de-commoditized it. And then you brand to keep your price andmarket going.But the best way to differentiate is to add Customer Value and this is with better service,customer experience and customer relationship. Marketing Professor John Quelch of theHarvard Business School says the most overlooked investment a marketer can make inadvance of inevitable commoditization is a customer relationship.You have to create value for the customer. First understand what a customer values anddeliver it and keep track of his changing value needs. Look even at "Uncharted value,"Professor Oren Harari said. And companies looking at uncharted value are not aspiringto satisfy customers. "Satisfaction is a commodity response to a commodity transaction,"Harari said. What you want is the wow! approach and to increase value.We have helped clients in businesses as commoditized and diverse as fertilisers, pestcontrol service and power distribution to de-commoditize by providing an emotional connectto the brand and by creating value. We have found that Values create value and help de-commoditize businesses. We have helped them differentiate themselves and look at nextpractices and superiority.Make your employees your internal partners, who will raise the bar and make customerinteractions moments of truth. And the only way out of the Commodity hell is to add value.So learn to measure what a customer values and deliver more of it than competition. Andvalue can be product, service, brand image, and customer relationship. Or you can play theprice game and die.
  3. 3. Remember, when you start turning your products into commodities, you start treating yourcustomers like commodities.Gautam Mahajan is a thought leader in Creating Value and de-commoditizing. He can bereached at mahajan@customervaluefoundation.comCall at (+91) 9971288580Gautam Mahajan, President-Customer Value FoundationM: +91 9810060368Tel: 11-26831226, Fax: 11-26929055email: mahajan@customervaluefoundation.comwebsite: